切遲杜威 (CHD) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Church & Dwight's first quarter --

Good afternoon. I want to thank you all for taking the time to join us today. By the way this is being webcast, and also to tell you that any comments we make today about forward-looking statements let the buyer beware.

As you all know, the entire business world is in unchartered waters today. Consumer confidence is at an all-time low. Retailers are struggling to survive. Commodity costs and foreign exchange markets remain extremely volatile. I personally believe that the worldwide economy will get worse before it gets better. This business environment makes it very difficult to forecast accurately. As they say, I don't know what I don't know. Can you hear me in the back? Okay.

So let me tell you what I do know. Despite these challenges Church & Dwight delivered outstanding Q4 and total 2008 results in terms of organic revenue growth, gross margin expansion, increased earnings per share, and record cash flow. Second, consumers love our brands. We grew share on all eight of our power brands in 2008 that represent over 80% of our revenues and profits. Third, we have strong partnerships with our retailers that will help us to manage through these difficult times. Fourth, the Church & Dwight management team is totally total shareholder return oriented. We've averaged 18% TSR growth over the past 10 years, including 4% last year, a year in which only 24 stocks in the S&P 500 had a positive TSR. And finally we will not let this recession deter us from making investments to drive our future EPS growth. We will maintain our advertising share of voice and our power brand, and we will continue to invest in delivering future cost savings, as exemplified with the startup of new start of the art laundry plant that's scheduled to start in Q4 of this year.

If you'd listened to me for the past four years, you know that I'm realistic and pragmatic. Church & Dwight has never missed an annual EPS target in my four year reign as Chairman and CEO. We've had significant gains to the tune of 35%, 13%, 19%, and 16% this past year. Our 2009 plan reflects a realistic and pragmatic outlook. It assumed lower organic growth in the last two years due to the recession and retailer actions. It delivers very strong gross margin expansion. It provides for strong marketing support behind the pipeline of new products. There's continued aggressive management overhead costs and we're targeting very strong EPS growth. I've always told you that the consumer packages industry is the safest place to invest during rough economic times, and that Church & Dwight is the best bet within the CPG industry because we have the best value orientation of any CPG Company. I believe in our ability to meet our 2009 plan and I have great confidence that we continue to deliver strong TSR to our investors.

Let me turn the podium over to Matt, who will provide details on our Q4 and total 2008 results, and I'll return to you to talk to you about 2009.

Okay, thanks, everybody. We're going to start with this slide I'm sure many of you are familiar with, which is our total shareholder return model. This is an evergreen model. We refer to it that way. It's an explicit model and I think it's important for everybody to remember how we use it. It guides our annual operating plan. So every year we pull this out and say are we delivering in accordance with this plan. The second thing is that it guides us with respect to evaluating acquisitions. So we want to make sure acquisitions can also support us achieving this particular model. And the third thing is our incentive comp is tied to it. So this matters to us. Three key goals you should be familiar with is the top line 3% to 4% organic growth, the 100 basis points of gross margin which is second, and you run your eyes down to operating margin of 60 to 70 basis points annually. So what we're after every year is 12% to 14% EPS growth, 12% to 15% TSR -- that would include the dividends. We're going to go through the quarter and then the year.

So here is the fourth quarter results. Run your eyes down the page. We had exceptional performance on all key metrics. So we surpassed our evergreen model. EPS of 44%, 11% organic growth, gross margin up 180 basis points, very wide expansion of our operating margin, 310 basis points, and finally free cash flow, $92 million in the quarter.

Here is some other numbers we should pay attention to. The 11% organic growth breaks out about 8% volume and 3% being price mix. We had slightly less marketing in the quarter as a percentage of sales, which is 12.7% versus 13% last year. We got some SG&A leverage. You may recall that we acquired the Orajel business, so we got 100 basis points of leverage there. [Huge] margin expansion as I pointed out before. Tax rate was a little bit higher. You probably read in the release that we had a higher mix of earnings in the United States. We also had some trueup with respect to state taxes.

Here is the full year. Full year again exceeding all of those metrics that we looked at on the very first slide exceeding our evergreen model. So EPS up [17%], organic growth 7%, gross margin 140 basis points -- 40 basis points by the way of that was Orajel, we have a slide on that later on and we'll look at gross margin expansion year-over-year. And you see operating margin of 80 basis points -- remember our target is 60 to 70 on an annual basis. And our free cash flow hit a record $289 million. You'll see on a lot of these slides we say excluding the new plant. So we're building a new laundry plant in York County, Pennsylvania. That will cost us $170 million. We spent $50 million so far in 2008, another $100 million in 2009, and the remaining $20 million in 2010, and the EPS associated with that is also stripped from our numbers. Most of that frankly is accelerated depreciation on the plant that we're going to be shutting down.

So back to the numbers. Take a look at this slide here. Again the 7% is the organic growth rate for the year. That splits about evenly for the year between volume and price mix. You see the 140 basis points, 40 of which was Del. Marketing you see is up 50 basis points. And you're going to see a slide later on from Jim that shows you over the last three years, every year, we've increased our investment in Marketing 50 basis points up year after year. And finally, margin up 80 basis points. So just a terrific year for the company.

Just a quick look back at the quarters. The quarters were a little more evenly distributed last year with the exception of the first quarter. I'm sure many of the sell-side analysts in the room remember the first quarter. And the first quarter we were helped by a lot of one-timers and some timing. Just to remind you we had a divestiture gain in the first quarter with some mark-to-market accounting favorable on a gain on a diesel hedge and we also had the timing of slotting very low in the first quarter. So we expect 2009 will be a much more balanced year. So Q1 is a difficult comp for us. So low 80s would be a reasonable expectation for the first quarter.

Okay, next slide, remember we said up front that our target is 3% to 4% organic growth rate, so I think it's helpful to go and look back at the prior years versus that particular model. You can see we've exceeded the target in four out of the last five years. You'll see back 2006, yes, we did have a 2% year, but we did hit our model that year with respect to the EPS growth rate. We're exiting this year with very strong momentum, particularly in the laundry business, and Jim will say a lot more later regarding our current thinking with respect to our call for organic growth for 2009.

Here is gross margin. 140 basis points of gross margin expansion, and every quarter in 2008 was up 100 basis points or better. You may remember at the beginning of the year, like many companies, we had raw material input increases put us behind the eight ball. So we had resin, soda, ash, surfactants, diesel, packaging materials -- everything was up tremendously. So we had a 300 basis points hurdle that we had to overcome. We had a lot of margin improvement programs. We had laundry compaction helping us, we had price increases on over 50% of our products, and also the backbone of our company frankly is our cost reduction program, which we call good to great. Sounds corny, but it delivers a lot of benefit year after year after year. So our track record gives us confidence that we can continue to deliver margin expansion in the future.

Now, we have three slides I want to take you through to illustrate the emphasis that we put on free cash flow in Church & Dwight. So you can see here this is free cash flow conversion. So it's free cash flow divided by net income. And our definition of free cash flow is cash from operations minus CapEx. And CapEx in this case is our base CapEx, which runs about $50 million a year. So we don't have the York numbers in here. So we had a significant improvement in our cash conversion cycle during the past year, because we had a major focus on worldwide receivables in inventory, and that working capital effort has just supercharged our free cash flow number this year. So that's free cash flow conversion. Well over 100% in each of the last three years.

Next is working capital. So working capital is a percentage of net sales. And you see the definition there, Accounts Receivable plus inventory minus [trade a pay]. Now why is this important? It's because we view the ability to manage working capital as indicative of the strength of the internal processes within the company. It's very difficult to knock working capital down at this rate unless you have a lot of different functions working together. And so that 9.3% number was really supercharged by the effort that we had in the company this year. And here is the last one -- here's free cash flow as a percentage in that sales. Again this is obviously the reflection of our success in 2008 and just another solid trend -- this the first time we've been in double figures with this particular metric.

Let's move on as far as CapEx goes. CapEx is managed in a very tight band. So if you look back over the last few years, you can see we're generally between 2% and 2.4% of sales, again excluding the new plant. And if you look at the last three years, '06, '07 and '08, you see around $50 million a year. And that's what we should expect as well for 2009, absent the plant. So this is an illustration that our business really is not very capital intensive.

Looking at the Balance Sheet a little bit more, so our total debt to EBITDA, again that green band is what we say is our target. So two to three times leverage you hear us talk about many many times. This is total debt to EBITDA. So our leverage ratio is below 2 to 3 as we end the year, despite that we had a $380 million acquisition of Orajel in July. And four of those five years on the screen we completed an acquisition. So we do have a conservative target in 2 to 3 times levered and it's helpful to remind everybody that we do stick to it.

As far as our financial capacity today, start at the top of the slide with $200 million in cash. Our debt -- you see where that arrow is. Our total debt is the same as it was at the beginning of the year, which is remarkable considering the fact that we've made an acquisition. We have about $200 million that's undrawn on our lines of credit. Our leverage is low. We're in a position now to do another acquisition should one meet our criteria. And the other interesting thing too is after we completed the Orajel acquisition we got an upgrade from S&P to BB+.

I'm going to end on this slide as far as how we use our free cash flow, and this is an order of importance right now for us, so at the top of the page is M&A, and you can see the most recent acquisitions we made -- Orajel in '08, OxiClean in '06. Next, you'd say the new product development would be second on the list, Arm & Hammer with OxiClean was a very important and successful product launch for us in 2008. It drove a lot of our organic growth. CapEx would be number three, so we're building a new plant. And number four obviously is lower on the list now because we're under our target leverage ratio. And finally the return to cash to shareholders, we try to increase the dividend at the same rate that we're increasing EPS.

Okay, I'm going to turn the agenda over to Jim right now.

Thanks, Matt. In a moment I'm going to talk about our management team, but I want to say to you -- Matt came to the company about two years ago and he's been an incredible addition to the company. The one example of the free cash flow -- doubling our free cash flow in two years is a phenomenal result to the company and he's really led the whole Company in an effort to do that and we very much appreciate it.

Your investments in our company and this slide says it. Why should you invest in Church & Dwight? Two reasons. We've had an outstanding track record of delivering superior total shareholder return and two, we believe we have a sustainable growth model in place to continue that strong track record.

Two charts, kind of interesting. This is a chart that compares Church & Dwight total shareholder return starting from your right, 10 year, five year, three year and the past year and against what we consider CPG major competitors out there. And you can see we have a phenomenal record. We've had an average 10 year TSR of 17.9%, number one versus all those other competitors. You've looked across the page. The only guy who outperformed us in recent times is [Chatham], a great little company, about one-third of our size that's got a phenomenal record. But still, look at what Church & Dwight has done. Even in the last year, we're the only guy in the positive zone on that.

Compare that to the stock market indices -- and this was a stunning one to me. If you invested in the S&P 500 10 years ago, you've lost an average of 3% a year. You'd have been better off putting your money in a 2% money market. But certainly versus those averages, which are all negative except for the Russell 2000, which barely cracks a 10 year plus, we have just blown those away. So obviously, we've had a great long term track record of returning gains to our shareholder. I was talking to one of our shareholders here. And they are very happy to be an investor with Church & Dwight for a long time.

So we have a good record. We're not overnight wonders. Our company is very well balanced, we have about 40% household, 41% personal care and we have this unique business called Specialty Products division -- that's animal nutrition, [number one] kidney dialysis solution, all of the uses of the baking soda in commercial ways.

It's kind of funny. Last two years I was getting beat up all the time, why aren't you bigger internationally, and now everybody is like thank God you aren't bigger internationally. We're 21% international. You know what's going on with foreign exchange right now, it's flipped about 20% to 25% in the last three to four months. So it's a hit for us next year, but it's manageable compared to the companies who have monstrous numbers to deal with there.

What are the reasons we have strong TSR growth? There's five. Strong revenue growth, steady margin expansion, aggressive overhead cost management, accretive on both acquisitions, and we have a very experienced motivated management team. We have over 40 brands in Church & Dwight. But there are eight brands that makeup the bulk of the profits and revenue, and these are the eight brands. Arm & Hammer, about 35% of our company. This brand is more out of the grocery store than any other brand in America and it's in 86% in US households. Trojan number one condom brand, OxiClean number one laundry additive brand, SpinBrush number one battery powered toothbrush brand, First Response number one pregnancy kit brand, Nair number one depilatory brand, Orajel number one oral healthcare pain relief brand, and XTRA which is a pretty major value brand there. Again, over 80% of our revenues in profits come from these eight brands, and I can probably say in 2008, all eight of these brands grew share last year, and you can see the numbers there.

I also want to point out two small numbers on that page -- you might say Arm & Hammer [is] only 6% and Xtra [is] only 4%. We make up 10% of the dollar share in the laundry category, so we make up over 20% of the unit shared in the category. One out of every five laundry bottles sold in America comes from our company. That's second only second to P&G. And you can see the share growth we had across the categories last year.

One of the big reasons why we've been accelerating new product development -- since I came on board, we created a separate new product development team. They've launched a record number of new products last year. We're not into numbers anymore. We're trying for fewer new launches with bigger and better launches. And it shows in the chart -- we got 7% organic growth last year. Terrific number.

Here is a bunch of new products we've launched. Arm & Hammer with OxiClean was the most successful laundry product we launched, Arm & Hammer (inaudible) detergent is doing very well. Odor Alert with the cat litter where it turns blue where the cat soils the cat litter, which is great because you want to get all of the soiled product out to keep smell down. Other products there, SpinBrush Swirl with the lowest price battery powered toothbrushes did well. Digital pregnancy kits. Shower Power, the first time a woman can take a depilatory in the shower where most women remove the hair on their legs -- couldn't do it before, it would wash off too quickly and now you can do it in the shower and get the benefits of the depilatory product, which is smoother legs and longer lasting hair removal.

At the same time, behind all those new products, we've been increasing marketing investing. You can see we've gone up 150 basis points in the last three years. So more new products, better marketing support for them. Here is one of the best examples. Arm & Hammer our biggest brand. When I came to this company in 2004, it was growing at 1%, pretty pathetic. Four years later, 11.3% growth last year. Phenomenal.

Let's talk about steady margin expansion. We've grown gross margin over 400 basis points in the past four years. Do the math. That's 100 basis points a year. We've proven we can do this, we believe we can continue to do this. Our goal is to keep doing that. We want to reach a 45% gross margin by 2012, that's averaging again 100 basis points a year. Half of that will come from internal efforts, organic efforts -- half of that through buying margin accretive acquisitions.

Let's talk about overhead cost management. This is my favorite slide in the whole deck. In the past four years -- four years ago we were $1.5 billion in sales, we had 3,741 employees. That works out to $391,000 per employee. Four years later, we've grown sales 60% to $2.4 billion, yet we've cut employees by 5% to 3,530. That works out to $686,000 per employee, a 75% growth in that number. That beats anybody in the CPG industry including those big guys out in Cincinnati who are 40 times our size. That's a phenomenal result. So it's pretty terrific when you can grow the top line, grow the margin and not spend back some of that on the SG&A line lower -- actually have it lower. So terrific theme of our company.

How do we do that? A lot of ways, but I want to tell you the truth. It's not over. We're continuing to restructure the organization. We're continuing to consolidate our worldwide supply chain. Last year we sold out of Spain, we closed the plant in England -- that will all benefit this year. And we have very tight control over healthcare cost. So that trend will continue.

Let's talk about acquisitions. We love them but we have a very defined criteria for them. We will only buy number one and number two brands. We want higher growth, higher margin brands. We prefer asset light brands. We want to take those businesses -- we want their brands, we don't want their people, we don't want their plants, we don't want their headquarters -- we throw it all in the back of our existing organization. And we believe with the strength of our company and sales and marketing we can drive share growth in those businesses.

I showed you before there's eight brands that drive 80% of revenue and profit. We didn't own seven of those brands in the year 2000. We've acquired them since then and built them. That's the model -- all those brands fit the criteria except for one, the 2003 acquisition of Unilever did not fit our model criteria. They weren't number one or number two brands. And honestly we look back and we had a second choice, we wouldn't have done it. And those brands have not done that well.

But everything else has been terrific. You can see we have tripled our revenue since 2000, driven by those acquisitions in organic growth, and here is the case in the last three acquisitions. The SpinBrush, OxiClean, and Orajel. In all cases we paid between $100 million to $400 million. We picked up $100 million to $200 million in sales. They all had higher margins. They were in categories we knew about, so we didn't have to hire new people to run them -- they were in oral care and laundry, two of our businesses. They were number one in the marketplace and they all very asset light. OxiClean to me was the best thing. OxiClean was a family owned business out in Denver, Colorado with about $200 million of sales. As an independent company they were making $15 million and had to pay for headquarters, salesforce. They were [co-packed]. We bought that business. We got rid of their headquarters. Out of 150 people we hired 10 people. We brought their products out of their co-packages to our plant at cheaper costs. In one year we tripled the profits on that business. And since then we've grown the market share in the business from the mid 20s up to actually 40% share in the latest Nielsen report.

Finally, I've said before and I'll say it again -- the experienced motivated management team. My management team comes from, was trained at all of the great companies. I came from 15 years at Kraft, Matt came from years of Allied Signal, my Head of Marketing has 25 years at J&J, my Head of HR came from Bethlehem Steel. Let me tell you something. You want to get an HR Manager, get it out of the steel industry. They know how to deal with tough situations. My Head of R&D [Reckitt] -- we're very proactive, we're highly committed, we're very passionate and we've very action oriented.

By the way, all of us after having 10 to 15 to 20 years in those major CPG companies, we probably spent three to five years in the private equity world, a very different world, very aggressive, more action oriented, faced a goal of double the size of the Company in three to five years and sell it. Guess what -- in the past four years, we doubled the size of Church & Dwight. It took 160 years to get to one place and four years we doubled that. And we walk the walk in overhead controls. Nobody in my company has a company car, including me. We don't have golf club memberships and we don't corporate jets. I think we're a little ahead of the world in this trend.

And the management team, we are 100% in the game. Our bonuses are tied to the four factors that drive total shareholder return -- 25% of our bonus is based on our revenue targets, 25% on gross margin expansion, 25% on operating margin, 25% free cash flow. Our equity compensation is 100% stock options. If stock doesn't go up, they're worthless. We don't have restricted stock that's worth something no matter what happens. We don't have performance based units based on some crazy formula. It's pure stock, just you when you buy our stock. And we're required to [skin in the game] -- we have to invest in the company stock.

All right, that's great, Jim, about the past. We want to know about the future. We believe we can sustain that kind of growth in the future. Again it starts with the eight key power brands. It's focused behind four trends I'll talk to you about. We have a strong pipeline of innovative products and it's supported by increased marketing spending. These will drive our strong revenue growth.

Here again are the eight power brands. The four trends that those are largely focused on are value, pets, green, and sex. How is that for four trends? I don't even talk about the world. The world is going to value right now. The rising unemployment out there, the rapid contraction of housing prices, declining consumer spending, tight credit markets. I said earlier on I think it's going to get a heck of a lot worse before it gets better out there based on my personal belief. And it's very sad but it's a tough world.

This is why we're different than other CPG companies. Over 30% of our portfolio is value based, but here is very specific facts. And that 30% basis makes us more recession resistant than any of the CPG companies. Our laundry brands, Arm & Hammer and XTRA, are 55% cheaper than Tide, the category leader. Our fabric sheet business, also Arm & Hammer, is 50% lower than Bounce, number one fabric sheet business. We have toothpaste brands like Aim, which are 50% lower than Crest and Colgate. We have pregnancy kits -- we have two. We have a leader at premium price -- First Response. We also have a value brand, Answer, growing at double digits at 30% lower than other brands in the category. And in cleaner category, a small category, but we have brands like Scrub Free that are 45% lower than Scrubbing Bubbles, a category leader there.

Private label -- lot of talk about private label. It is a threat, but we believe it's a manageable threat. You'll see in most of our categories, today private label is a fairly small share. It's only big in parts -- cat litter, baking soda and pregnancy kits. But we looked in 2008 how much private label share gains were. As you can see, for the most part they're not big. Nielsen just finished a study recently and said the biggest [jump] in private label will come in categories where private label is already baked. It makes sense. People have already tried it. So when they are hurting for money, they've already tried it before and they will try it again. In categories they have never tried, they will be resistant to try something they've never tried before.

But you can see there, and I can show you -- baking soda yes, we're 80% share, private label 20% share. There is nobody else. We lost 2 points last year. We took price increase and the category had profit growth to it. Pregnancy kits is a big factor, but we actually gained share in pregnancy kits last year with the great work we did in our First Response brand and the gain on the Answer brand.

Talk about pets for a second, an interesting fact I love. Almost two-thirds of the households today have a pet. Only one-third have a kid. America is becoming a pet world. That's why all the people in CPG want to feed them, and we take care of the other end. So you can see we're in the cat litter business. We entered this business in 1998, and in 10 years we're the number two brand in this category. So we love this category because it has terrific growth behind it.

Green, all about environmentalism. The population all of a sudden in the past 12 to 24 months has become very environmentally oriented. 54% considers itself mainstream green. 58% of US adults believe chemicals and pollutants are more of a threat than they were 10 years ago. People are throwing away tons of plastic bottles filling our landfills, and only 7% are recyclable. Big opportunities there. About 2.5 to three years ago, we launched a subbrand of Arm & Hammer essentials. We first launched the laundry detergent, the the fabric softeners, then underarm deodorant, then cat litter, and most recently cleaners. Nice little business, growing double digits. We have over $35 million in net sales so far and this is a nice steady safe business going forward so far.

Talk about sex. We folks are not a sexually healthy nation. 19 million people in this country every year are infected with sexually transmitted disease. 1 in 14 girls have an STI. AIDS, which was on a decline, is now back on a rise again. Nearly 3 million unintended pregnancies in this country and there are 2 billion unprotected sex acts a year. One out of four sex acts in this country between two people who don't know each other's sexual health, and only one out of four use a condom. Three out of four times people take a risk of getting sexually transmitted disease -- that's why we have those horrible statistics there.

Hey, we win either way. Either use our condom where we have a 75% share. Or don't use our condom, you'll use our pregnancy kits. So we have record shares in both businesses. However, I'm being kind of funny, our condom business again is only used one out of the four times it should be used. We would like to drive that number north and we've been trying desperately through new products and marketing campaigns to do that.

And I'd like to show you -- you're the first to see this. This will be a commercial running on Valentine's Day this year, which happens to be one of the five highest points in the year for sexual acts. So take a look at our new Trojan commercial. (video playing)

You guys aren't laughing? Come on. We're trying to get people to wake up. This is what's going on in America. The spread of diseases is out of control and we're trying to get people to wake up, use a condom every time.

So on pipeline today of new products, here is a smattering of them. A new fabric softener world -- we're combining both the liquid and the sheets into one. A two in one product, a hot trend in a lot of categories. Throw this into the dryer and get the benefits of both liquid and sheet fabric softeners. A new form of OxiClean spot treater, doing tremendous, off to a great start.

Condoms, two things. We have what we call the condom card. One of the biggest issue with condom usage is people say I didn't have a condom on me when the act occurred. We now have a new condom card that comes with a very heavy plastic case that actually snaps in two. You can put one into your wallet or purse. It's very discreet, doesn't scream condom on it and you can have it in your purse and won't get crushed in your wallet over time. We expect to do a lot of business on this one, especially at C stores where people can run into and get something out quickly, and it will be preserved in your pocketbook or wallet. A new condom that has a new shape that's more sensitive called Ecstasy coming out.

New things on Nair for different forms of the Shower Power very successful, and a Nair version of exfoliator for skin. That's new Orajel products. And a new SpinBrush. Sonic has a much higher speed SpinBrush, a more powerful cleaner. These brushes usually cost anywhere from $50 to $150. We're launching this one for $15. Should be interesting. And again we've increased marketing support -- I've told you we have been increasing steadily over the years. I'll tell you in a few minutes we'll hold flat on dollars next, but the spot market on marketing spend right now is down between 10% to 20%. So we'll get a lot more impressions for the same amount of money. So in a sense our spending is going up, but we don't have to go up to get more impressions.

Let me talk about 2009. Once again the model. Start with the model -- as Matt said, this is our evergreen annual model we target to, but every year has little pluses or minuses on each one of those with one exception. We want to get the 12% to 15% total shareholder return. Look at our model. Look at what we're telling you. We only believe in this world right now with what's going on with consumer trends, what's going on with retailers that 2% are realistic guidance right now. Honestly, I believe the worst is yet to come. I will be honest with you, in 11 out of the 12 categories we compete in -- category, not our business but total category -- consumer buying was down exiting last year. And I don't view the end of last year as a rough time, it's going to be a lot worse. So when I look at this next year, it's going to continue to decline across the year and I think calling 2% is very realistic. Other CPG companies are calling between 2% to 5%, I think 2% is very realistic going forward. And I can get 12% to 14% earnings growth with only 2% organic revenue growth.

Margin, we'll do better than or equal to 100 basis points next year, good year on margin. Marketing is [what I said] -- we'll hold dollars flat in that case. SG&A, overhead, lower next year. Lower dollar spending in SG&A. I'll tell you why in a minute. Tax rate is about 36%. That leads to an operating margin of over 100 basis points and that leads to 12% to 14% EPS growth. Beginning of the year, we usually come out and say at this point in time with all of the uncertainty going on in this marketplace we think it's an appropriate start. 12% to 14% to my knowledge is the best EPS call in the CPG industry of any CPG competitor out there. So we're at the high end of the range.

Let me talk about the reasons. 2% organic growth. What's the good news? Pricing last year -- we priced 50% of our portfolio. That will lap into this year. We got a strong pipeline of new products, almost all of which are margin accretive. And we exited last year with very strong share trends, good news. But, big but, lower category volumes due to consumer spending. I see a continued decline in consumer spending across the year. Private label, every retailer in this country talked about growing private label. They see this is the right time to do it, they see the time when consumers are looking for value. The majority of private label brands are value, and retailers are pushing hard to grow their private label brands. Why? They make more margin.

So they believe this is the time if ever the time to grow private label. We think that will cause pain. I told you before, private label is not big, but with almost every retailer out there pushing, it's going to be a year with some pain to share. I don't think it will last long personally. I think a year from now they will all back off somewhat and go back to brands, but 2009 is going to be a year of pain from private label.

The other thing, retailers are in a big effort to reduce SKUs now. They want to get their inventory down and they're reducing the inventory and SKU harder than ever before. You add that up in my mind, and I think a realistic and prudent call on organic revenue growth is 2% at this point in time. I hope I'm wrong, but I think it's prudent at this point in time.

Gross margin, this is great news. We have five factors driving gross margin. Three are common industry. We've had pricing and mix actions -- again we took pricing over 50% of our portfolio last year. That's lapping into this year. We are not going to lead any price declines. Lower commodity costs, you've seen what's happening, there's a big drop off in a lot of commodity costs -- a few that are up, but the bulk of them are down -- that's a cost saving benefit. As Matt said, we have this corny program called Good To Great but it works. It's reformulation, reducing packaging, reducing SKUs, hedging on commodities. We've had tremendous costs on that, a very strong program in our company.

But every company has those three basic factors. Two that are very unique to us that help us deliver better gross margin expansion with anybody else. The acquisition -- we bought Orajel middle late last year. The bulk of the benefit will come through that year, that's a 60% plus gross margin business, $100 million -- you do the math. Laundry compaction was completed about the middle of last year. It was a nice benefit of gross margin on laundry business. So we'll get benefit in the first half of this year, in which it wasn't totally compacted last year.

We're not stopping. We're looking beyond 2009 to 2010, where as we speak we're building a fantastic new laundry plant in York County, Pennsylvania. It's going to be about 25% more efficient than our plant in New Jersey and everything is going very smoothly on speed. And again we'll get benefits from this starting Q4, but mostly 2010 to help our gross margin get to our goal of 100 basis points a year.

Marketing wise, again, dollars are flat. We've increased as I said before marketing spending over 150 basis points last three years, but advertising costs less right now. I've seen the spot marketing from 10% to 20% lower than it was a year ago. So with the same amount of dollars, we can buy more impressions, and that allows us to maintain or actually grow we hope our share of voice for all of our categories.

SG&A, we are just [mongers] about this. We've had continued tight controls. We've consolidated our worldwide supply chain to take costs out. And we benefited from divesting businesses last year in Spain and selling a plant in the UK. So SG&A dollars is lower in 2009.

So it all adds up to a very steady record we've had in this growing EPS. Again 12% to 14% is actually the low end of what we've done the last four years, but I think in this economy right now going on there, it is a very aggressive call. Again, I don't know that any other CPG company who is over 10% right now. So I think calling 12% to 14% is aggressive where it is now. Be nice to beat that, but I think it's a very prudent call in the business world. As I said earlier, to anything I said about the future, buyer beware. With that, Matt and I will take questions that you may have.

Mr. Bill Chappell.

Just on the Orajel side, if I'm doing the math correctly, the 40 basis points that the [margin] note, I assume in six months it will be 46.9 -- is that correct? (inaudible)

Yes, the way to think about 100 basis points is what we said -- we expect to meet or exceed 100 basis points. Netted into that 100 basis points is we're actually overcoming a big drag from FX transaction. So what that means is in Canada, Mexico, and some European countries, to the extent that we source in US dollars, cost of goods sold for those countries is going to be significantly higher -- about $10 million to $12 million. That's actually also about $0.11 of EPS. But that's a drag that we're overcoming as well in that 100 basis points. So that alone would be about 50 basis points that we're covering. But you're right. The impact from Orajel next year will probably be about 50 basis points.

Jim, can you maybe help us understand the prudent caution, are you seeing in January first part of February destock, retailers focusing on private label versus your brand slowdown in sales or something? Or is that just caution after what could happen after the remainder of the year?

I expect the year to get worse. We're seeing a little bit of it right now. We expect the situation to deteriorate over the course of the year based on what we're hearing from retailers and based on the consumer trends we're seeing. So it's a projection. The year is actually off to a pretty decent start. But we're seeing signs of what's going on out there that make us very nervous. And at this point in time, we can get the 12% to 14% earnings growth with only calling 2% organic growth, and I think in the end, I don't know if that's worse case, but in the end it's a very prudent realistic case in the year. And again, the other major companies are only calling for the most part 2% to 5%. We aren't like minus 5% and they are plus5% and they are like what the hell you doing? We're very much close to the range. We're calling in our [eyes] at low end of the range based on what we see out there. But again, early. It's largely our forecast with what's happening.

I have a follow-up on the first quarter. You've called for this 2% organic growth for next year, and you just reported 11% organic growth. So one might think that maybe your shipments were ahead of consumer consumption in the fourth quarter and that's coming out of the first quarter. So could you just comment whether your organic growth in the first quarter is above or below that 2%?

It would be above. And as Jim points out, we expect a deterioration in category spending throughout the year. And there was no inventory loading in the fourth quarter.

So maybe a reason for that 2% organic growth was just the tough comp in the fourth quarter for next year?

That's part of it. That's going to be a difficult comp for us once we get to the end of the year and the country is in worse shape.

Okay, and then in the fourth quarter could you take apart that 17% increase a little bit more? How much were your detergents up and did that match your sell-through at retail in your view?

You're referring to the 17% in your eyes is the retail growth number. And again organic was 11% for us but in general, yes. Our laundry business is doing exceptionally well right now, and all of the value oriented businesses we have are doing very well. But I'll also tell you again, we grew all eight of our power brands last year. Every one of our brands had a very good fourth quarter last year, but laundry was exceptionally good in the fourth quarter. There was no meaningful inventory low.

So detergents were up something like 25%?

We don't comment by category.

Could you comment on how much your market shares in detergents were up at retail, including all of the retailers like Wal-Mart?

Off the top of my head, I don't have a number.

In the slide you can see the Arm & Hammer Liquid Laundry up year-over-year, record shares.

It was strong. It was strong.

Did you gain 3 points of share?

No, no, not that much at all.

Okay.

Thanks. I was wondering if you could talk a little bit more about the pricing environment. With commodities coming down, retailers pushing back harder, if you have a very weak demand environment, maybe some of the competitors get more emotional -- what gives you the confidence that you're going to see the pricing environment hold up as well as you are?

I would say so far so good. In all of our businesses, I've not heard of one price decline action. I said we're certainly not going to lead any actions. We only have led the world in categories where we are large -- Trojan, baking soda businesses are the ones we lead and the rest we follow. And the category leaders in all of those other categories have not shown any sign of taking price declines. So I'll be honest with you, I think in the other categories, the leaders in those categories had much more significant foreign exchange problems than we do. They have to make up for those in some ways and I think the big guy in Cincinnati has been very clear they do not intend to lead any price declines. But then again if there's continued significant decline in commodities and there's pressure from retailers, who knows. I'll just say the same thing they said. I don't intend to lead any price declines but I only lead in a couple categories. The bulk of the categories we follow. But everything I'm seeing from competition -- there's nobody out there is saying they are going to be taking price declines. It's the only thing I've heard about there is Clorox in garbage bags, and we don't compete in that category.

Then just a quick one on the shelf space comments. You allude to private label picking up space, but you go through and have private label shares at less than 5% in both categories. Is there any one category in particular where you're seeing heavier increases in private label shelf space? Or I guess if they're coming from such a small base and the gains are coming from categories where private label has higher share positions?

I wouldn't say it's every category, but in a lot of the categories we're in, we're hearing about the retailers talking about private label harder. They are going to do that. They are going to increase their shelf space with their brands. That means other guys lose. That's what we see. We see it happening. It's pretty much across-the-board. It is the talk of the talk in the retail industry right now. Every retailer out there is talking about my share of private label this, I want to take it to this. And they're looking for every opportunity they can do it. And to do that they have to take more shelf space up to their brands, more merchandising space, more merchandising effort up to their brands. And it's an early call, but we're nervous about it. Even though in the end, it's not going to, they aren't going to become category leaders, but there's pain by everybody in those categories. it's the retailers who control distribution, control merchandising, control pricing, are going to have the ball in their hands to what to do and all they are talking about now is growing private label. So we're nervous.

So no sense you're getting hit disproportionately versus other brands?

Not at this point in time.

One last one. On the marketing spending side, do you guys tend to buy a lot more spot or up front?

We're about 50/50, which is honestly more than most people are, but about half our budget in the spot side. And that's what I said, the upfront has held amazingly. The networks are refusing to renegotiate the upfront from what we've seen. The spot market though is a daily thing, and the spot market right now is generally down between 10% to 20% versus year ago.

So we should think of your ad spending rate being down 5% to 10%, so if you're flat in dollars, your [waits] are up 5% to 10? Is that a reasonable way to think about it?

That's reasonable.

Thank you.

Jim, could you just talk about destocking -- I mean is there any fair dilutions? Because destocking so far looks like it's been more of the distribution center side. But have any of your brands or anybody else's been thrown out point blank?

I'm not going to comment by category, but that is a risk, Bill -- that retailers again, it's just sort of like private label. They talked about it for years, but now, they are really doing stuff on both private label, inventory, SKU reductions, destocking, like never before. And so yes, there could be a particular accounts we lose some businesses, but also I'll tell you the truth -- in a lot of our top brands we're gaining distribution. But I would say it's a net negative because the retailers are more than ever doing it and we can't control it. We can argue with them, but if they decide to reduce the SKUs or knock an item out or two in that and their account, they control the decision. And like I say we just never seen it at this level before going on.

So it will be, that's why we're -- without that I would certainly call higher organic growth. But I just think over the course of the year there's going to be pain to pay for it. And I think 12 to18 months from now, the retailers in large part will realize their business grew less than it would have if they kept the brand assortments they've had or kept the SKUs they had. But they are convinced now is the time to go private label, and they'er pushing it harder than ever and delisting SKUs harder than ever and pushing inventories lower harder than ever. They are cash strapped. You've seen the same-store comp sales. They aren't good and these guys are cash flow junkies as we are and looking for ways to preserve their cash, grow margins. And they decided private label is the best time ever to push it.

Isn't -- March is sort of planogram season for most of your categories, right? So wouldn't you know what's staying and what's going?

It's something in discussion right now. That's where there's early signs with some of the retailers on a large number of the businesses. What we're seeing is we haven't seen final plans, but we've seen enough to make us worry. We've seen enough to make us worry what's going on.

Okay.

That's why I say it's realistic and prudent in our eyes to take a lower position, a low end of the zone of CPG, in the 2% zone now to see what happens. God forbid, I hope I'm wrong. And I hope some of the retailers may reverse any decisions they make before the year is over and put stuff back in. But at this point in time it's a prudent position to take I think of calling that -- because again we can get the 12% to 14% earnings growth, which is the 2% organic growth call.

And hypothetically, which one of the products might be at risk?

I'm not going to go category by category in that. Almost anything is at risk. And for competitive reasons and retailer reasons, I just don't want to get into what we know. Retailers get upset if we even told what they were doing. We've been warned, even competitors don't know what's happening in certain cases. So we've been warned too many times we can't talk about what retailers are doing because they view it as we don't want anybody knowing and stuff like that. So we have enough insight at this point in time to make us nervous.

Okay, great. And Matt, what was the input cost headwind and basis points this year and what are you expecting for '09?

For '08 it was 300. So 300 basis points [of hurt] in '07 going '08.

Do you have an outlook for '09?

Yes, we done the slide for '09? The gross margin bridge from '08 to '09? No. In other words I'm not going to call how many basis points improvement we'll get from commodities, but it's going to be substantial.

And any adverse hedges like a layover from July when you locked up some stuff?

Yes, we had a hedge for a couple million gallons of the diesel oil for '09 by about $11 million annually. So $2 million of the $11 million. And because of mark-to-market accounting, that's been marked down to the low price as of 12/31. So that's not going to really hurt us next year other than a cash side.

But gross margin would have been even better if you didn't have these hedges in place this quarter than the 180 basis points, yes?

No, that hedge won't hurt us in this quarter. It's only going to hurt us to the extent oil goes down to $20.

Right. Okay, and then lastly, just in specialty chemicals business -- that's a more economically sensitive business. It's still about 15% of sales, right? What's the outlook for that piece?

Yes, there's two pieces to the Specialty Products business. Half of it is dairy and half of it is chemicals. On the chemicals side the big part is bulk sodium bicarbonate, and you think about bulk sodium bicarbonate, where does it go? Into food -- so Kraft, different food companies would buy bulk sodium bicarbonate. And it would also be used in industrial water filtration, et cetera. So there are things on that side that actually -- kidney dialysis as well. So there are a number of things that keep that business pretty steady. And we went and looked back at previous recessions and saw that side of the business was pretty strong.

The other side of the business, the dairy business, dairy farmers are struggling because the price of milk has come down. Inventory levels are also rising a bit, and that's because the exports are down as well for milk. So what has to happen on that side is the number of cows have to be taken out of the system and that's happening right now. So to the extent that happens over the next six to 12 months, the price of milk starts going back up ,they get healthier. So there's softness on that side of the business, animal nutrition.

Thanks very much.

Okay. Question from the other side? Connie?

Hi. What do you estimate the days or weeks of inventory of your products to be at retail? Is it growing or declining?

It's typically four to six weeks of supply.

And it's been relatively flat, maybe a little down. We've not seen a huge destocking issue across our brands.

Okay. Do you also think some of your customers will file for bankruptcy this year? And if they do, would that disrupt your sales and shipments as that inventory works its way around?

We monitor our retail very very closely -- not only retailers, but the other side that is equally as important is our vendors. We do have less co-packers and people that ship raw materials and some of them aren't that big. So we've got a process in place to study both very closely. But right now, I wouldn't say we have a big exposure to our sales base, as a result of the economy.

And does the tight credit markets affect your supply chain in any way?

It can affect smaller suppliers to the extent that they don't have a credit line and they are dependent upon their weekly, monthly cash flows. So that's why the smaller vendors were more concerned about it. It hasn't gotten to the point where people are looking for us to bank them. It hasn't gotten to that.

We had a wake up call last year. The largest trigger spray manufacturer in this country went bankrupt suddenly. Caught everybody by surprise, everybody in the industry, the cleaner industry, using trigger sprayers was caught short. We had to source around the world and it cost us extra money. It woke us up to the fact that how on the edge some of these suppliers are. It led to a major effort to study every one of our suppliers out there very carefully. We thought there was risk, we had gotten dual sources and things like that -- so that won't happen again. And luckily we managed it okay. It didn't affect supply, but it got very close at certain points in time.

Great, and just a follow-up question. What were Orajel sales in the fourth quarter?

We typically don't call the sales of an acquisition, but the thing you should remember is that the annual sales for Orajel were about $100 million and it's a pretty linear business, so you can do the math.

Jim, can you talk a little bit about the M&A environment -- what do you think the odds are you'll be able to execute another acquisition this year?

Good question. M&A, there's a lot of opportunities out there. As usual, a lot of it is junk. A lot of strategics are doing some strategic portfolio looking right now and looking to shed businesses, which is good news. A concern is though that there's not a lot of bidders at the door as usual because of the credit market is so tough, private equity is not at the door, it's slowed some of the action. But even some of the strategic players are not being able to source cash right now. So it's leading to some of the sellers rethinking whether they want to sit back and wait, because in most cases these are big companies. They don't need to sell and they are deciding whether or not maybe I'll wait six to 12 months for the credit markets to open up and I'll have a bigger line at the door, a more competitive auction.

So in some sense, because of that it may result in a little bit of slowdown. But I would tell you we're actively on the trail of a couple opportunities right now. But again we don't know in the end if the seller will go through with the deal. But I'd still hope so. We're in great shape. We've got -- Matt showed you -- how much, $700 million? If we push what we have availability on?

Yes, as far as $200 million of cash and $200 million of undrawn lines. And we given our rating and our reliable cash flow, we will be able to access our credit line. We have an accordion feature where we can borrow another $250 million.

So our usual range is $100 million to $400 million for acquisition. So we have the money. We can make the deals now. It's just the case -- will sellers be willing to sell without thinking they could wait a little longer and get a better price?

Are those strategic sellers mostly the big pharma companies?

They are the key players. That isn't all of them though.

Would it be your preference to stay in the OTC pharmaceutical area?

No. We like that area. We're in that area, but no. We again -- we're agnostic between household and personal care. Orajel was one of our best acquisitions ever in the household side -- sorry, OxiClean was, Orajel was a great -- we'll go anywhere with a number one or two brand, margin accretive, asset light, growth opportunity. We don't care. Any other questions?

Well, all right. I think I said to you my mantra going forward is in these rough economic types -- and again I'm probably more draconian than most, I think it's a very very rough year for not only the US but the world. The consumer package industry is the safest bet you can place. Within the industry we are the safest bet in there. We have a long track record of delivering the numbers. I think our strategies are on track and we have great momentum. And I think we're being realistic and prudent at this point in time, 12% to 14% EPS growth is the top anybody is calling now. And I have pretty good assurance in my mind we can deliver those numbers. So I want to thank you all for coming. And if you have further follow-up questions we're always available down in Princeton, New Jersey or by phone. And have a good day, thank you.